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HETER ISKA 101 (IPES)
WHAT IS A HETER ISKA AND HOW DOES IT WORK
BY RABBI MEIR ORLIAN, FACULTY MEMBER, BUSINESS HALACHA INSTITUTE

Published in: Jewish Press. Publication Date: 05/13/2009.

The Torah, in Parshat Behar, exhorts us to assist other Jews financially, and prohibits taking interest from them. The Chofetz Chaim (in Ahavas Chesed) expounds upon the tremendous mitzvah of granting an interest-free loan, and recommends that each person apportion some tzedakah money for granting such loans. It is perfectly permissible, however, for a person to invest money in a Jewish business, and to share proportionally in whatever profits or losses there may be.

To facilitate economic interaction, and to allow the defined return typical of a loan in a halachically acceptable manner, poskim over the last five-hundred years developed the "heter iska" (lit., permission of business partnership). However, heter iska does not magically allow interest-bearing loans, but rather it is a legal document redefining the nature of the "loan." Therefore, many poskim require the parties to have an understanding of how heter iska operates. We will try to provide a basic "crash course" explaining this.

Heter iska is based on a partnership arrangement called "iska," mentioned in Bava Metzia (104b). One person would provide capital for a business venture, and the other would actively run the business (similar to a silent/ active partnership nowadays). Half the money was defined as an interest-free loan to the active partner, which would be repaid even in the case of total loss; the other half remained capital of the silent partner, which allowed him to receive profit. Thus, at the end, the money would be returned, and any profits (or losses) would be shared. The modern heter iska is an adaptation of this iska arrangement.

To illustrate, consider the following scenario. I have a shofar factory, and just developed an easy-blow shofar. With Rosh Hashana coming, I approach Bank Mizrachi for a $100,000 loan at 7% to finance my factory. Since Bank Mizrachi is not allowed to charge interest, it attaches a heter iska to the loan contract. There are numerous versions of heter iska, but all contain four basic components, with the mnemonic: IPES.

(I) Investment, not Interest: The most important part of the heter iska, which allows Bank Mizrachi to receive a return on their money, is a legal redefinition of the loan transaction. Like the iska partnership, half the money (in some versions, all) is redefined as an investment, still owned by the bank, in my factory. Thus, the bank is an investor, the recipient is an active manager of the invested funds, and the additional return payments are profits of the investment - not interest! [All references in the contract to "loan," "lender," "borrower," and "interest" are to be understood in this context.]

Thus, we avoid an interest-bearing loan by defining instead a profit-bearing investment. But then, if my business flops, Bank Mizrachi should also have to share in the loss! Step two of the heter iska comes to protect them against this.

(P) Protection of Principal: While it is not permissible to guarantee the investment principle 100%, Terumat Hadeshen allows making it difficult to claim a loss and avoid repaying the principle. We stipulate that I will not be believed to claim a loss on the basis of my own record keeping, but only if I present complete documentation and halachically valid witnesses. While theoretically possible, it is unlikely that I will be able to produce such evidence, so Bank Mizrachi can be reasonably sure that their money will not be lost.

On the other hand, if my shofar sales boom, Bank Mizrachi is entitled to share in the profits of their "invested" money. However, these profits may amount to less than the 7% they expect, or much more than I'm interested in giving! This takes us to stage three of heter iska.

(E) Expected Earnings: Based on the aforementioned Terumat Hadeshen, the Kuntres haSM"A allows the parties to predefine an expected earning on the "investment" money. The active manager will be believed that profits were less only if he brings valid proof or takes a severe oath in a Jewish court of law. As an alternate option, he can elect to pay the expected earning, and will then be relieved of this responsibility to swear. Conversely, if he pays this amount, the Bank waives any further claims against him. Thus, it will be difficult for me to claim a profit of less than 7%, yet I can suffice with giving only 7% profit even if business skyrockets.

However, an aspect of interest remains in this arrangement. As a profit-sharing partner in my shofar business, shouldn't Bank Mizrachi also share in the daily work? To work for them gratis is itself considered interest on the half that is a loan! This is part four of the heter iska.

(S) Salary for Services: The Bank must compensate me in some way for my services on their behalf. They can do this by giving me at the beginning a token salary (e.g., a dollar) for my efforts. Alternatively, the heter iska can stipulate that I am entitled to an extra share of the profit (e.g., 2/3 instead of 1/2) in lieu of salary.

Thus, by affixing a heter iska to the "loan" from Bank Mizrachi, we achieve instead an investment partnership, which protects the principle, allows payment of mutually determined expected earnings, and provides a salary for services of the active partner.

People in Israel encounter the need for Heter Iska in their daily financial dealings, since most transactions are between Jews. For this reason, all Israeli banks and many financial institutions have a broad Heter Iska declaring that all their activities are subject to the terms of Heter Iska. However, there are many instances in which even individuals living in the United States need Heter Iska.

Consider the following scenarios:

After many years of renting, the Boneh family was ready to purchase their dream home, and arranged a mortgage through a Jewish-owned mortgage company.

Mr. and Mrs. Mazel asked their relatives for loans to help cover their daughter's wedding, and promised to add the 2% that the money would earn had it been left in savings.

All of these scenarios are essentially interest-bearing loans, and are prohibited without a Heter Iska. A business that routinely involves such financial dealings with other Jews, as well as private lenders and borrowers, must arrange that their "loans" be based on Heter Iska. [Heter Iska forms in English are available from the Machon L'Choshen Mishpat.]

These scenarios also raise an important question about the application of Heter Iska. Redefining the "loan" as a business partnership investment that provides profits is reasonable for business loans, as in the example of the shofar factory. However, how does Heter Iska apply to personal loans, such as a mortgage to buy a house, financing for a new car, or money to make a wedding? There is no business here in which to invest, and there are no profits to speak of!

Many poskim write that if the borrower has other profit-making investments, pensions, or business equivalent to the amount of the personal loan - we can consider partnership in those assets in lieu of the money he received for the house, car or wedding. Furthermore, in the current market setting that real estate fluctuates and houses can rise in value - the purchased house itself can be considered an investment. It is even possible to argue that a car needed to travel to work, or education necessary for a profession, can also be considered a viable "investment."

What if the recipient does not have any investments? Rabbi Yosef Shaul Nathanson (Sho'el U'Meishiv) dealt with this question 150 years ago. A teacher, who had no business to speak of, asked whether he could borrow on the basis of Heter Iska to marry off his daughter? R. Nathanson allowed it, reasoning that without the loan the teacher would have to abandon his job to procure money for the wedding. Thus, although the loan did not lead directly to any profit, its indirect effect on his ability to continue earning is considered a business in which the lender can become a partner. Maharsham concurred with this ruling, while many others argued that Heter Iska is not applicable in such circumstances.

Despite the availability of Heter Iska, the Chofetz Chaim admonishes us not to ignore the mitzvah of granting an interest-free loan. In fact, there are numerous free-loan organizations throughout the world. I would also like to share an inspiring story that someone told me last week. He had lent money at a high interest rate to an acquaintance who was experiencing financial difficulties and unable to receive loans from elsewhere. At some point, the lender caught himself; he was violating the prohibition against interest outright! He called the borrower and said that he is cancelling the interest and asking to repay only the principle. The borrower, who was non-observant, was dumbfounded.

The lender was a simple person - but had withstood a difficult test! How many of us would simply forego the hefty return we expected?

This particular story had a fascinating ending. Ultimately, the borrower declared bankruptcy and his debts were partially discharged. However, he told this lender: "Of all the creditors - I am going to make a special effort to repay you completely!" This is a beautiful fulfillment of the Chofetz Chaim's conclusion: "A person should trust in Hashem and believe that through clinging to the mitzvah of chesed, G-d will send blessing in his endeavors." (Ahavas Chesed II:15)

&nbspHi BHI, welcome to Need An Eitzah. Thank you for your extremely informative answer and we look forward to seeing you around. Please note that by clicking register at the top of the page you will be assigned your very own picture to go next to your name as well as providing you a way to recover your account. Enjoy! - Yehuda HaMaccabiAug 22 '12 at 14:16 reply

&nbspwow that took me a while to read, there is no one like the Chofetz Chaim] - gadol hadorAug 23 '12 at 16:45 reply

&nbspJust arrived here from searching for hetre iska on google! I must say this is the first time I have understood Heter Iska. But why do we need the 4th point? They are not letting me do buisness with the other half because they lent me the other half, they are doing buisness cos they want to gain? - TreebeardSep 14 '12 at 15:36 reply

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A Heter Iska makes the lender a partner with the borrower in a business venture with the lender's share being equal to the lender's investment with interest. An important aspaect is that the borrower's other assets can not be collected from in case of failure as the borrower has no personal obligation to repay the loan.